ANS War premium falls

ANS nosedives $9.27 in two trading days as Israel/Iran peace declared

Steve Sutherlin

Petroleum News

Alaska North Slope crude plummeted June 23 on news of a peace agreement between Israel and Iran in the wake of a decisive U.S. strike on Iran's massive underground nuclear weapons facility. ANS closed at $72.99 per barrel -- down $6.77 on the day, as West Texas Intermediate plummeted $6.42 to close at $68.51 and Brent plummeted $5.53 to close at $71.48.

Prices continued to crater June 24 with ANS diving 2.50 to close at $70.50, WTI plunging $4.14 to close at $64.37 and Brent plunging $4.34 to close at $67.14.

In two trading days, ANS saw a $9.27 war premium erased from its price of $79.77 June 20.

Futures trading turned positive June 25 as losses were stemmed by strong U.S. crude demand seen in data from the U.S. Energy Information Administration showing a second consecutive massive weekly drawdown in commercial crude inventories.

In early Asian trade June 26 as Petroleum News went to press, WTI traded at $65.46, and Brent traded at $68.14.

U.S. commercial crude oil inventories for the week ended June 20 -- excluding those in the Strategic Petroleum Reserve -- plunged 5.8 million barrels from the previous week to 415.1 million barrels -- 11% below the five-year average for the time of year, the EIA disclosed in its weekly report issued June 25.

Analysts answering a Reuters poll had called for a 797,000-barrel draw.

Gasoline and distillate levels plunged as well.

Total motor gasoline inventories fell 2.1 million barrels for the period to 227.9 million barrels -- 3% below the five-year average for the season, The EIA said. Distillate fuel inventories fell 4.1 million barrels to 105.3 million barrels -- 20% below the five-year average for the time of year.

Analysts in the Reuters poll had forecast a 381,000-barrel build in gasoline supplies.

"We are looking at big draws across the board," Phil Flynn, senior analyst with the Price Futures Group told Reuters. "This type of report can refocus on U.S. supply and demand, and less on geopolitics."

Crude was further supported by U.S. macroeconomic data showing lower consumer confidence and potential weaker-than-expected economic growth -- raising hopes for a Federal Reserve interest rate reduction in July.

On June 20 ANS rose 10 cents to close at $79.77, WTI fell 21 cents to close at $74.95 and Brent rose 31 cents to close at $77.01. June 19 was a federal holiday.

On June 24, ANS closed at a $6.13 premium over WTI and at a $3.36 premium over Brent.

What next for Israel/Iran situation

Yardeni said that the Trump administration may be able to make the region less febrile by expanding the 2020 Abraham Accords, in which several Arab nations recognized Israel.

He said, "In an ideal outcome, the Mullahs' regime would be overthrown in Iran, replaced by a new government that focuses on promoting domestic and regional prosperity rather than terrorism."

Conversely, the current regime could survive or be replaced by a military dictatorship -- either way Iran would remain hostile to Israel and the U.S, Yardeni said, although that is not his base case.

"Such a government could prolong the war and create lots of havoc by attempting to close the Strait of Hormuz and by continuing to attack Israel and starting to target American interests in the Middle East," Yardeni adds. Under this scenario oil prices would spike, boosting the chances of a global recession.

"The market has shown that it's been very resilient to some of the geopolitical shocks that historically would have sent prices skyrocketing," Angie Gildea, U.S. energy lead for accounting giant KPMG told NPR. "We didn't see that much with Russia-Ukraine, and we haven't seen that with Israel-Hamas. And we're certainly not seeing that in this case."

Iran has not blocked the Strait of Hormuz, which analysts see as unlikely in part because of the intense economic pain it would cause Iran.

Rebecca Babin, a senior energy trader at CIBC Private Wealth told NPR that traders have learned to be cautious, based on crude price action after Hamas attacked Israel, or when Israel attacked Iran last year, or at other times when tensions have mounted.

Even if supply was not interrupted, there was a time when just the possibility of disruption might have pushed prices up to eye-watering levels -- oil markets often respond to fear as much as to reality, Babin said.

The U.S. position as dominant worldwide oil producer is a stabilizing factor.

"The impact on the oil market is profound," said Jim Burkhard, S&P Global crude oil market research head. "It is among the most important factors why the response in the oil market to geopolitical conflict in the Middle East is limited and often disappears once the fear of a potential disruption dies down."

The U.S. can produce a lot more shale oil quickly, allowing a rapid response if there was a major supply disruption that led to a prolonged price hike, he added.